What is Overdraft Facility?
For businesses navigating the complexities of financial management, access to timely funding is crucial. One such instrument designed for short-term needs is the overdraft facility. Essentially, an overdraft facility meaning allows businesses with current accounts to withdraw funds exceeding their available balance, up to a pre-approved limit. Consequently, this od facility serves as a readily available source of finance to bridge temporary cash flow gaps.
Most financial institutions offer a company overdraft facility, with the sanctioned limit and interest rates determined by the bank’s assessment. This form of finance can be either secured, backed by assets, or unsecured. Businesses, ranging from sole proprietorships to larger enterprises, can leverage this option.
OD Facility Example
To effectively manage your money, it is critical to understand the concept of an overdraft. So, let’s simplify using the example below:
PQR Private Ltd, a company with a current account at XYZ Ltd Bank, has a credit balance of Rs 750 Lacs. The company needs to make a payment of Rs 820 Lacs to one of its vendors. After analyzing the expenses, the company realizes that it needs additional cash to make the payment.
Hence, the company approaches its banker and applies for an overdraft of up to Rs 850 Lacs. The banker approves the application at a reasonable ROI. Thus, the company can now use the overdraft amount as and when required and will pay interest on the amount used above the credit balance.
Overdraft (OD) Terms
The terms of a loan may vary depending on the borrower’s profile, repayment capacity, relationship with the banker, financial history etc.
Features of OD Facility
- The overdraft facility helps in the effective working capital management of the company. It solves the immediate cash crunch. Also, It gives flexible repayment options to the current account holders.
- The credit limit depends upon the relationship of the borrower with his banker and also his credit score.
- Generally, the credit period is 12 months. Thus, the borrower has to renew the facility according to their requirements.
- The interest is charged only on the extra amount used. Other than the credit balance of the bank account which varies as per the amount of the Overdraft.
- The repayment of the OD is not done through EMIs. However, the borrower can pay as and when he is available with cash but before the end of the credit period.
How to Maximize Your Overdraft Facility?
The OD facilities can be a helpful way to manage your finances, but it’s important to use them wisely, as they can be expensive. Here are some tips for maximizing your overdraft facility and avoiding unnecessary fees:
- Only use your overdraft facility for short-term expenses.
- Make sure you have a plan to repay your overdraft as soon as possible.
- Shop around for the best overdraft deal.
- Consider using a credit card instead of an overdraft facility.
- Be aware of the fees associated with overdrafts.
Learn more about the dropline overdraft facility here.
Overdraft facility at Terkar Capital
We facilitate access to overdraft facilities, streamlining the application process for eligible businesses seeking flexible funding solutions. Therefore, understanding the nuances of an overdraft facility is vital for effective financial planning and ensuring business continuity. As a result, the below overview provides financial decision-makers with a clear understanding of the overdraft facility’s meaning, its benefits, and practical applications within the Indian financial landscape.
|
# Particulars |
OD Facility |
|
Min Amount (Rs. INR) |
25 Lacs |
|
Max Amount (Rs. INR) (No capping) |
Rs. 100 cr + |
|
ROI |
Repo Rate Linked |
|
Tenure |
Revolving |
FAQs
1. What are the eligibility criteria for an OD facility?
There are no set criteria for eligibility. It varies from lender to lender. But factors like the borrower’s age, credit score, earning/turnover, and relationship with a banker are considered majorly.
2. What is the procedure for obtaining an OD facility?
A borrower applies for an OD facility. The bank checks their credit score, relationship with the bank, earnings, and eligibility. If approved, the OD is sanctioned.
3. Who can avail of the OD facility?
Current and savings account holders can get an overdraft facility from their bank, depending on their relationship with their banker. Individuals, self-employed professionals, and enterprises can be borrowers.
4. Is there any requirement for collateral?
Collateral depends on the borrower’s availability and whether they have it. Interest rates are comparatively higher for unsecured loans.
5. Who offers the overdraft facility?
Almost all banks provide OD facilities to their saving and current account holders. Nowadays, financial institutions also provide such a facility.
6. How long can the bank account be overdrawn?
The time duration of the overdraft depends upon the agreement between the banker and the borrower. Generally, the facility is provided for 12 months and has to be renewed at maturity.
